Hargreaves Services - only for the bravest investor

Hargreaves Services (HSP.L): When I wrote on Hargreaves in July, I commented that it was only for the bravest. So, with miner’s helmet on and Davy lamp at the ready, it is eyes down for the finals to 31^st May 2015. After a year of chopping off and reducing various activities, these numbers focus on the continuing businesses, so excluding lots of the bad bits. The cost of the ‘simplification programme’ in the year is put at £9.3m. On the continuing basis, revenue was £662.2m, down 23.8%, with underlying pre-tax profits down 26.9% at £40.3m. Underlying diluted eps were down 24.8% at 93.9p, with the group moving to a higher payout ratio, resulting in the full year dividend being up 17.6% at 30p. As guided at the trading update, net debt has ended the year at just £1m, down from £68.8m a year ago. They guide that debt will increase now, as they build up their coal stocks by £16m-£18m, before again declining with further cash generation being forecast, “under normal conditions”, for the year as a whole. They do point out that this year’s profits will not be protected by the hedges and forward sales which helped in FY2015. Against the backdrop of low import coal volumes and prolonged low coal prices, they are looking to expand in renewable energy, biomass and materials handling. Coal may have few friends at the moment, but green energy has been nudged down the political agenda, so the strategic shift is not a certain success in my view.

Despite all the operational problems, the group is bullish on the dividend and has kept share buybacks on its radar. This year’s dividend was a 31.9% payout ratio and they want to progress to a 40% rate, “subject to continually assessing our forward cash and earnings profile”. Quite what that means for the payout in FY2016, when consensus eps are just 43p, I’m not sure. Given their tone on cash generation, I will assume a flat dividend of 30p. The shares have bounced nearly 10% today, to 348p. That is a forward PE of 8.1x depressed earnings and a yield of 8.6%. The market capitalisation is £108m, with little debt, for which you get a company with revenues of, using a wide range, £550m-£650m. This still looks cheap if you are super brave. The risk is that if coal markets stay this bad (or even get worse) then this set of results may end up being seen as a moment when the board played on, despite a hole beneath the water line. (Neil Cumming^, 11^th August 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower